I get a lot of questions about refinancing — “Is now a good time to refinance?” “How can I tell if it’s worth it to refinance?” “What steps are involved in the refinancing process?” It can be confusing, especially if you’ve never done it before. So let’s take a look at what you need to know about refinancing your mortgage. To do that, I’m going to walk you through the experience of one of my clients.
Levi and Maggie’s Refinance Story
Meet Levi and his wife, Maggie. I helped them buy a home in 2017. They got a great interest rate when they bought – 4% on a 30-year fixed mortgage. Now they are three years in to their loan and seeing refinance rates around 3%. So Levi emailed both me and his mortgage broker team at Megastar Financial (one of my preferred vendors), and said, “I’d like to educate myself about the possibility of refinancing my mortgage.” Here are some of his key questions, along with what we told him.
“What Does Refinancing Mean?”
Refinancing your mortgage means getting a new loan to replace your current one. When you refinance, you have the chance to lower your interest rate and change the length of your loan. Levi and Maggie looked at a number of options and chose a 30-year fixed-rate loan. But they could have chosen pretty much any loan length; lenders can accommodate just about any term.
Because it’s a completely new loan, you’ll need to qualify just as you did for your original mortgage. Minute Mortgage – a HomeSmart Realty Group partner – recommends having a clear financial picture including your credit score and debt-to-income ratio as well as a good estimate of how much equity you have. As your REALTOR®, I can absolutely help you with an equity estimate.
“Is It a Good Time for Me to Refinance?”
This is such a smart question! Just because rates are low doesn’t mean it’s the right time to refinance for everyone. The refinancing decision is highly personal and based on your specific situation. The advice in this article from Bankrate.com is solid, and I recommend reading the entire piece. Here are the highlights:
- You should think about refinancing if interest rates drop below the rate on your current mortgage by at least half a percent and you expect to stay in your home for at least a few years. This gives you time to recoup the costs of the refinance.
- A refinance can also make sense if your credit rating has improved since you closed on your current mortgage. Better credit qualifies you for better interest rates.
- If you want (or need) to lower your monthly mortgage payment, refinancing can help you do that.
- Refinancing to a shorter loan term is a good move when you want to pay off your home faster and pay a lot less in total interest.
- If you have an adjustable rate mortgage (ARM) and are worried about interest rates going up in the future (which would raise your payment), you may want to refinance into a fixed rate loan.
- If your home’s value has increased in the time you’ve had your loan, a refinance may also let you pull cash out. You can then use that cash to meet other financial goals.
- If your current loan includes mortgage insurance and you now have at least 20% equity in your home, a refinance can let you remove the insurance. This can save you hundreds of dollars in some cases!
Levi and Maggie do expect to stay in their home at least long enough to recoup their refinancing costs through the reduction in their monthly payment. Their credit was strong when they bought their home three years ago and that hasn’t changed. They wanted to lower their monthly payment to put the savings aside for retirement and college. So for them, now was definitely a good time to refinance.
“What Does It Cost to Refinance My Mortgage?”
Refinancing isn’t free. Every loan has fees you’ll have to pay. You should expect the total out-of-pocket fees (not counting escrows for taxes and insurance) to be around $2,200-$2,500. Here are the most common fees included in that total:
- Application fee – This usually averages from $100-$300 and covers the lender’s costs to assess your creditworthiness for a loan. Many lenders will negotiate this fee or waive it completely.
- Loan origination fee – This fee is how your mortgage broker/loan officer gets paid. It will typically be around 0.5% – 1% of the amount of the new loan. On a refinancing loan of $300,000, this would be between $1,500 – $3,000. Lenders often can roll this fee into the amount of the loan so you wouldn’t be paying for this one out of pocket. Alternatively, you can choose to pay out of pocket and leave your loan amount unchanged.
- Appraisal fee – You can expect to pay around $600 for an appraisal in the metro Denver real estate market. An appraisal is the lender’s way to make sure that your home in its current condition is worth at least the amount of the new loan.
- Document fees – This covers the preparation of various disclosure and truth-in-lending documents.
- Title search fee – Title companies typically charge to examine the title on your property and ensure it has no liens, encumbrances, or other issues.
- Recording fee – The city/county sets this fee; it’s their charge to record the refinancing transaction and make it part of the public record. In Arapahoe, Denver, Douglas, and Jefferson counties, it’s typically less than $100.
- Flood certification – If your home sits in a federally designated flood zone, your lender may require you to add flood insurance or life of loan insurance coverage.
“What About Discount Points?”
Levi and Maggie were also curious about discount points and how those might work in a refinancing scenario. “Discount points” consist of pre-paid interest you can pay up front to lower the interest rate on your loan. A “point” is 1% of the loan value, and you can usually pay eighth-, quarter-, half-, and whole points. Levi and Maggie chose to pay an eighth point to bring the interest rate on their new mortgage down from 3% to 2.875%.
“Are There Any Potential Problems with Refinancing?”
Once you qualify for your new loan, the process generally runs without a hiccup. One thing you should research, however, is whether there is a prepayment penalty on your current mortgage. According this article from legal website Nolo.com, most mortgages issued after 2014 are subject to federal law that prohibits prepayment penalties. It’s certainly worth checking with your current lender, since prepayment penalties can average 1%-2% of the outstanding loan balance.
A Great Outcome for Levi and Maggie’s Refinance
I’m happy to report that Levi and Maggie successfully refinanced into a 30-year mortgage at a fixed interest rate of 2.875%. They’re saving $210 per month, which will allow them to recoup the costs of refinancing in a little more than 12 months. Once those costs are behind them, they’ll have $2,520 a year to direct however they choose.
Thinking About Refinancing? Contact Me
If you are thinking about refinancing, give me a call at 303-204-6494. I can run the numbers on your home’s current value so you’ll be able to estimate your equity. I also have several fantastic lenders to refer who will take great care of you and make the process as seamless and stress-free as possible.